On the Line / Accounting / How Restaurants Can Navigate Food Inflation and Protect Profitability

How Restaurants Can Navigate Food Inflation and Protect Profitability

Put rising food inflation into historical context and uncover action items to help protect profits and remain agile in the face of sustained economic pressure.

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DISCLAIMER: This content is provided for informational purposes only and is not intended as legal, accounting, tax, HR, or other professional advice. You are responsible for your own compliance with laws and regulations. You should contact your attorney or other relevant advisor for advice specific to your circumstances.

Times are tough — there’s no easy way around it.

Food inflation is driving ingredient prices higher. Wages are up. Labor capacity remains a struggle.

These headwinds can easily eat away restaurant profitability if operators don’t act, and quickly. 

While there’s no “solving” for food inflation, the negative impacts can be mitigated and margins protected. Operators have multiple means of riding out this wave of high inflation without sacrificing profitability.

Keep reading to learn more about the current food inflation and its impact on restaurants to date. See what’s happened in past inflationary environments, and get a few ideas for how to limit the negative impacts of inflation.

Key takeaways

  • August 2022 CPI for food away from home is up 8 percent YoY — rising 0.9 percent MoM in August after rising 0.7 percent in July MoM
  • Restaurants may continue to capture consumer budget as August 2022 food at home is at a staggering 13.5 percent YoY
  • Gas prices are down 10.6 percent MoM after a 7.7 percent fall in July — encouraging for consumer restaurant spending that's hugely impacted by gas prices
  • Past inflationary and recession environments show that customers trade down rather than out of restaurant spending — and it's already happening
  • Operators can capture the trade down and help protect profitability by optimizing sales channels and controlling costs
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Historic food inflation poses risks to restaurant profitability

What is food inflation?

Whether you’re new to it or need a quick refresh: Inflation is an economic measure of the increase in price of a set of goods and services over a given period of time. 

Food inflation is simply confined to increases in price for goods and services tied to food.

Restaurants and consumers are dealing with historic food inflation

There are a few ways economists track food inflation. All are measuring at or near all-time highs.

Food inflation via Consumer Price Index

The Consumer Price index (CPI) measures the average change over time in the prices paid by urban consumers for specific consumer goods and services.

The food index, including grocery, restaurants, and other food services, increased 11.4 percent from August 2021 - 2022, the largest 12-month increase since the period ending May 1979.

The Bureau of Labor Statistic's CPI for food away from home is up 8 percent over the last year (August 2021-22) — that's a 0.4 percent increase from July's 7.6 percent YoY measure.

Limited-service meals increased 7.2 percent and full-service meals 9 percent YoY. The YoY measure for limited service stayed flat from July (7.2) while the full-service meals YoY measure is up 0.1 from July.

Both measures are up month over month, 0.7 percent for limited service and 0.8 percent for full service.

Food inflation via Producer Price Index

The Producer Price Index (PPI) tracks the average change over time in selling prices received by domestic producers of goods and services from their perspective as the seller.

With some good news for a change, the YoY PPI for finished consumer foods fell from its recent April peak of 34.6 to 29.3 — still an incredibly staggering number considering that’s still nearly over twice as high as the prior highest YoY increase on record (15.6 percent in August 2010-2011).

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The PPI for final demand foods is up 15 percent from July 2021-2022. That's higher than June's YoY 12 percent but still down from the recent April peak of 16.3 percent YoY. 

For July, fresh and dry vegetables prices top chart being up over 60 percent, followed closely by processed poultry and dairy products, up 26.5 and 21.3 percent, respectively.

One inkling of positivity is that meat prices are easing, with July YoY meat prices down 2.7 percent from July 2021 prices — still cheaper YoY, but not as drastic a decline as June's YoY numbers, which sat at 9.3 percent.

What’s contributing to the current food inflation?

Mike Dorning, agricultural correspondent for Bloomberg news, succinctly lays out all the various issues driving food inflation.

“A combination of higher shipping costs, energy inflation, fertilizer shortages, extreme weather and labor tightness means it’s more difficult to produce food…The war is now tipping the situation into a full-blown crisis. Russia and Ukraine are major wheat, fertilizer and food producers, so hostilities are severely disrupting output and delivery from Black Sea ports.” - Mike Dorning, ‘Breaking Point’: Soaring Inflation Drives Cuts to Hunger-Relief Programs

General inflation's impact on consumer sentiment

For a bit more historical context, more consumers mentioned reduced living standards due to rising inflation than any other time except during the two worst recessions in the past 50 years (March 1979 to April 1981, May to October 2008), according to the University of Michigan Surveys of Consumers.

Along with plummeting sentiment, Donald Grimes, University of Michigan economist, highlights that real disposable income per capita in the United States was about the same in April 2022 that it was just prior to the pandemic  in February 2020.

"That’s good, right? Not so fast. According to Grimes, real disposable income per capita normally grows 2%-3% per year. A growth period this weak is unusual outside of recessions. From an income growth perspective, we are in a recession-like period." - Donald Grimes, Not a recession? That might be news to real disposable income

As we'll cover later, this weakened sentiment points to a shift in restaurant consumers' spending habits. It's by no means a death knell for restaurants, but it could be wise to use as a signal for financial and operational optimizations.

Any good news on food inflation and the restaurant industry?

While it’s mostly grim, it’s not all grim. There are a few positive numbers across the industry to brighten the scene.

Data from Revenue Management Solutions shows that restaurant traffic is down 4.3 percent YoY in July — quite an improvement over the 9.4 percent YoY decrease in traffic reported in May. Sales measures are improved YoY for July.

"Traffic and sales have returned to summer 2021 levels when many customers felt more comfortable returning to restaurants after mass vaccination efforts," says RMS analysis.

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Food inflation impacts and risks for restaurants

Food inflation and high gas prices are a restaurant perfect storm

Food inflation decreases profitability due to higher ingredient and labor costs paired with lower sales due to weakened consumer spending — and then there’s the impact of soaring fuel prices.

A report from foodservice research firm Technomic shows how every $0.50 increase in gas prices results in a "$68 billion impact on consumer spending." 

The top two mentions for cutbacks are limited-service and full-service restaurants, with 49 and 48 percent of respondents respectively.

A similar survey from Reuters and Ipsos found over half of Americans (54%) say rising gas prices will most impact how they spend their money on meals at restaurants. 

Here’s a breakdown of the most impacted consumer spending buckets due to rising fuel costs: 

  • Restaurants - 54 percent

  • Entertainment - 49 percent

  • Home improvement - 47 percent

  • Vacations - 46 percent

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Customers trade down rather than out during turbulent times

There’s a common thread in data from past inflationary times and prior recessions — consumers look to trade down to more value-based options rather than trade out of restaurants entirely.

May 2008 through July 2008 was the last time the average national gas prices rose above $4 per gallon, Technomic reports

Comparing this span of higher gas prices year-over-year with 2007 shows a definite decline in limited- and full-service restaurant sales — with full-service restaurants getting hit nearly twice as hard as limited-service (falling 4.3 percent and 2.2 percent in 2008, respectively.)

Academic research that shows the growth rate during recessions in the limited-service sector is still considerably high (2.43 percent) compared to full-service operations (0.08 percent). The study is based on National Restaurant Association data spanning between 1970 and 2009, so it includes six defined recessions.

This research highlights consumer willingness to continue patronizing restaurants during inflationary periods and recessions. And the resilience of limited-service operations during these times highlights the consumer sentiment toward trading down rather than out.

According to commentary from Jana Zschieschang, CMO at Revenue Management Solutions, we’re well into the trade-down phase this time around:

“When the average check increases but basket size (the number of items per order) decreases, it is a strong indicator that consumers aren’t getting ready to tighten their belts — they already are. The market is volatile, but one thing is clear: we’re officially in a trading down environment.”


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Actions to protect your restaurant profits from food inflation

Food inflation doesn’t have to be the restaurant grim reaper. Current and past inflationary and recession data shows this.

And with the advances and availability of powerful restaurant management platforms, operators have tons of tactics and strategies at their disposal for protecting profitability.

Raising your restaurant prices

The obvious tactic is simply raising prices and shrinking portions. And guess what — everyone is doing it.

Analysis from Revenue Management Solutions shows that consumers are already paying more for less. Higher menu prices (+11.8 percent) are driving the increase in check performance while basket sizes continue decreasing (-2.7 percent).

Take a look at a very real life example of ongoing food inflation straight from the frontlines. Feedwell Kitchen & Bakery shared the staggering calculations driving their recent price increases:

Restaurants have been hammered with COVID and now food inflation. Simply breaking it down for customers and appealing to their empathy and sense of reason could be a great way to instill trust and build stronger customer relationships — all while easing any tension with the price increase.

Of course, any price increases should be part of a cohesive menu pricing strategy rather than a random price.

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Maximize margins while capitalizing on trade downs

Any resilience in the restaurant space during inflationary times seems dependent on capturing the trade down — providing real value while maintaining great experiences.

Findings from Acosta, a sales and marketing agency, show one-third of diners are already choosing to trade down with their restaurant ordering rather than not ordering at all — seeking deals and special offers, ordering less expensive menu items, and generally going to less expensive restaurants.

Here are a few steps that can help capture trade downs without minimizing margins:

1. Determine where your restaurant fits in your local ecosystem. 

What are the menu price comps for similar restaurants in your area? 

If you’re already consistently lower than the rest, then you’re already positioned for trade downs — not to say you shouldn’t look to further optimize your menu for a long haul of turbulent times.

And if you’re the restaurant with consistently high prices relative to your peers, it may be time to add some value-based options to the menu.

2. Ideate on how to satisfy price points that have traditionally been beneath your target menu prices.

The idea of lowering menu prices during high food inflation seems backward. You probably should be raising menu prices if you haven’t already this year. That doesn’t mean you can’t lock in some trade-down market share with new items and prices.

This is where menu engineering and recipe costing both shine, helping you balance prices and target profit margins. 

Recipe costing systems can show you down to the penny how much each serving of every recipe costs. And menu engineering folds those costs into consideration with pricing, menu design, and more.

This exercise can also help reduce the number of unique ingredients used across your menu — lowering how much on-hand inventory you need to operate.

3. Think strategically about all the specials and limited-time offers (LTOs) that you run across your operation — food, drink, dine-in, takeout, all of them. 

Discounts are often reliant on customers adding additional, non-discounted items to pad margins. What would happen if more customers exclusively ordered discounted items and nothing else?

If customers are only ordering specials and not adding on regular items, you’ll need to make up the difference in margin through your discounted items. This could mean smaller portions, lower discounts, or even combo deals that pair high- and low-margin ingredients to balance overall item profitability. 

This can also be a great time for your chefs and culinary team to get creative. LTOs don’t even have to include a discount. Instead, experiment with a few favorably priced, once-a-week item that uses exclusivity rather than discounts to drive sales.


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Take control of all your restaurant costs

The first step in taking control of your restaurant costs is consistently tracking them. Ongoing restaurant costs breakdowns are critical for this tracking. 

A restaurant costs breakdown is the calculation and analysis of all the costs associated with opening, operating, and optimizing a food business. It’s typically broken into fixed and variable costs — with variable being the primary lever in need of controlling.

The two biggest restaurant variable costs include cost of goods sold (COGS) and labor costs — also known as restaurant prime costs.

Controlling COGS

Taking control of your COGS starts by tracking price changes from one order to the next for all the products required to make and sell your food. 

This includes all your ingredients — produce, meats, dairy, dry goods and pantry staples — as well as takeout and delivery containers, other paper goods and non-alcoholic beverages.

The single source of truth for these costs is the restaurant invoice. Humbly accompanying every order, the details within each invoice can often be overlooked by operators and bookkeepers. 

You only need the total invoiced amount and basic categorization to generate monthly profit and loss statements, but monthly PnL statements aren’t enough for navigating food inflation.

Individual line-item details are where invoices tell their stories. Invoice processing automation is how to get them to speak and uncover actionable COGS insights — and that’s exactly what xtraCHEF by Toast can empower operators to do.

Controlling labor costs

Taking control of your labor cost starts by tracking all the costs associated with your staff, including payroll for salaries and wages, benefits, and taxes.

Labor costs calculations aren’t as simple as adding up the hours worked and multiplying it by wages.

For example, if you pay an employee $20 an hour, it actually costs you closer to $23 or $24 an hour with added costs such as insurance and taxes.

As food inflation forces COGS higher, you can help balance it out by getting smarter on labor costs.

The New Steps of Service is a proven way to do more with less without sacrificing service quality or experience. Toast Payroll and Team Management, as well as Scheduling, Powered by Sling, are two other systems that can help you start tracking and tweaking labor costs.


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Optimize sales channels to sustain profitability

Today’s restaurant technology provides operators with multiple channels to monetize menus, all tied to the same back end, and all available to adjust and monitor on the fly. This tech-driven agility and flexibility make it a great time to be running restaurants.

Toast’s latest Restaurant Trends Report highlights the importance of operational flexibility. The data showcases how diner sentiment has shifted back to on-premise dining after a dip caused by the COVID pandemic.

Sales for on-premise dining in Q2 2022 grew nearly 22% compared to Q1 2022. Takeout and delivery grew approximately 6% in Q2 2022 compared to Q1 2022.

It’s time to get back to delivering great dine-in experience — while still maintaining margins and efficiencies for takeout and delivery channels.

Dine-in

You can help optimize your physical presence by adopting the New Steps of Service. It’s a modern way of structuring your front of house and digitizing service.

Take it from Toast President, Co-founder, and Director, Steve Fredette:

“QR codes enable self-service that allow the guest to order and pay on their own and create a more efficient experience across the front of the house… [enabling] servers to focus on more rewarding roles, like welcoming guests, helping them choose the right menu items, checking in, and not having to spend time swiping credit cards.

At the same time, diners can keep ordering food and drinks without having to worry about flagging down a server. It’s clearly a win-win –– digitizing the more cumbersome aspects of restaurant management creates a more positive experience for staff and guests alike.”

Mobile POS and QR-codes are at the foundation of the New Steps of Service and of Toast’s Mobile Dining Solutions™. The system can empower operators to do more with less by:

  • Serving more guests with fewer staff by enabling guests to start and add to the tab. Restaurants using Toast Mobile Order & Pay™ typically see an average 10 percent increase in revenue.1

  • Simplifying the checkout process to save time. On average, Toast mobile payments can save servers 4 minutes per table compared to traditional methods2 and guests tip 9 percent more on transactions paid on Toast mobile payments vs. traditional methods.3

  • Streamlining counter service via more empowered employees and additional order and checkout options for guests. On average, QSRs with Toast Mobile Order & Pay™ typically see 8% higher revenue per labor hour.4

Takeout

Data from Mourning Consultant shows 56 percent of U.S. adults are still getting takeout multiple times a month, with 14 percent doing so multiple times a week and 5 percent daily. 

Toast TakeOut can help you increase sales and meet your guests wherever they are — all while saving you from the commission fees other third-party delivery apps charge for takeout. 

Checkout our helpful ROI calculator to see what you can save from the $0 commission alone.

Delivery

As our friend Nina Quincy from Underbelly Hospitality says, “revenue buys forgiveness…” But what can you do when that forgiveness dries up? That’s what’s currently happening with delivery relative to the past two years.

Delivery has dropped off as data shows comfort dining out has soared from 23 percent on May 15, 2020 to 76 percent on May 15, 2022. 

With this cliff in mind, it’s critical that operators optimize delivery processes to ensure the sales channel is a worthwhile venture rather than a meager margin maker. Toast Delivery Services™ can help operators reach toward that optimization by: 

  • Enabling you to stay in control of delivery orders made online or via the Toast Takeout App until they make it to their final destination. 

  • Offering the ability to adjust minimum ticket sizes and pass some, or all, of your delivery fee to your guests.

  • Providing access to reporting and analytics that summarize delivery trends so you can adapt operations based on guest behavior.

Where do you go from here?

There’s really no telling where food inflation will be a year from now. 

Between COVID, fuel costs, wonky supply chains, deglobalization and on-shoring, the war in Ukraine, crop harvests, and countless other impactful macro events (looking at you, monkeypox!), it’s all up in the air.

The best thing you can do as a restaurant operator is to stay rooted in the now. Use yesterday’s performance analysis to inform tomorrow’s success. Think strategically about your levers of profitability — menu prices, restaurant costs, sales. And keep track of short- and long-term goals.

If you play your cards right, customers aren’t going anywhere.

Joe Pawlak, managing principal at Technomic, nails it:

"One thing that the pandemic has taught us is that using restaurants and foodservice is a deep rooted habit for Americans — and Americans will continue to find ways to enjoy its perks despite any external challenges."

Help customers help you by mixing up price points and offering something for the trade down consumer. And help yourself by adding the efficiencies and automations provided by the entire suite of Toast products.


1Toast restaurants who add Toast Mobile Order & Pay™ typically see an average increase between 10% and 12% in Toast processing volume. Based on the average impact seen across different Toast restaurant segments. Based on at least 12 months of Toast internal data. Individual results will vary.

2Based on Toast internal data from August 2021 among restaurants using Toast mobile payments. Individual results will vary.

3Based on Toast internal data from 2021 among restaurants using Toast mobile payments. Individual results will vary.

4Based on Toast internal data from 2021 among restaurants using Toast Payroll. Individual results will vary.

Menu Engineering Worksheet
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Menu Engineering Worksheet

Use this menu engineering worksheet, complete with intricate menu engineering formulas, to determine areas of strength and weakness in your restaurant's menu.

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